As financial manager of Material Supplies Inc., you have recently participated in an executive committee decision to enter into the plastics business. Much to your surprise, the price of the firm's common stock subsequently declined from $40 per share to $30 per share. While there have been several changes in financial markets during this period, you are anxious to deter¬mine how the market perceives the relevant risk of your firm. Assume that the market is in equilibrium. From the following data you find that the beta value associated with your firm has changed from an old beta of to a new beta of _. (1)(2)(3)(4) The next dividend, D1, was expected to be $2 per share, assuming the "old" 5 percent growth rate.

Question

Quizplus · Accepted Answer

To find the new beta value, we need to use the following formula:

New beta = (New stock price / Old stock price) * Old beta

Substituting the given values, we get:

New beta = (30 / 40) * Old beta

We are not given the value of the old beta, so we cannot calculate the exact new beta. Therefore, option C, which is the only one that includes both values in the answer choices, is the best choice.

To calculate the new expected dividend, we can use the following formula:

D1 = D0 * (1 + g)

where D0 is the old dividend (which we are not given), g is the growth rate, and D1 is the new expected dividend. We are given that the old growth rate was 5 percent, so we can use this to calculate the new dividend:

D1 = 2 * (1 + 0.05) = 2.10

None of the answer choices includes this exact value, but choice C is the closest, so it is still the best choice.

As Financial Manager of Material Supplies Inc